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The Shadow Cost of Repos and Bank Liability Structure

Author

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  • Nataliya KLIMENKO

    (University of Zurich)

  • Santiago MORENO-BROMBERG

    (University of Zurich)

Abstract

Making use of a structural model that allows for optimal liquidity management, we study the role that repos play in a bank’s financing structure. In our model the bank’s assets consist of illiquid loans and liquid reserves and are financed by a combination of repos, long–term debt, deposits and equity. Repos are a cheap source of funding, but they are subject to an exogenous rollover risk. We show that their use adds to the cost of long–term debt financing, which limits the bank’s appetite for unstable repo funding. This effect is, however, weakened under poor returns on assets, abundant deposit funding and the depositor preference rule. We also analyze the impact of a liquidity coverage ratio, payout restrictions and a leverage ratio on the bank’s financing choices and show that all these tools are able to curb the bank’s reliance on repos.

Suggested Citation

  • Nataliya KLIMENKO & Santiago MORENO-BROMBERG, 2015. "The Shadow Cost of Repos and Bank Liability Structure," Swiss Finance Institute Research Paper Series 15-04, Swiss Finance Institute, revised May 2015.
    • Handle: RePEc:chf:rpseri:rp1504
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    More about this item

    Keywords

    Bank financing structure; repos; liquid reserves; rollover risk; regulation;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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